Behind the Wheel | 2014 Subaru Forester: Subaru Forester: A Crossover Jostling to Fit in Showrooms Already Full

Not that Subaru is doing badly. Sales in the United States have increased in each of the last four years, setting records. But the Forester — last reworked in 2008 — has not been part of that growth, with sales shrinking some 10 percent in 2011 and stalling at that level last year.

The Forester has, in part, been a casualty of the brawl in the compact sport utility market in recent years, with automakers landing blow and counterblow by improving fuel economy while adding luxury, performance and safety features previously unseen in this class. Chasing market leaders like the Honda CR-V and Ford Escape, the major automakers are updating or introducing new models very quickly, said Tom Libby, senior forecasting analyst at Polk, the automotive data firm.

Now Subaru joins that melee with a Forester that offers more room, new features and better fuel economy, all based on the underpinnings of the redesigned Impreza introduced in 2011. Subaru’s two-pronged market strategy continues: there’s the standard Forester 2.5i and then the 2.0XT, a sportier turbocharged model.

Prices start at $22,820 for a 2.5i with a 6-speed manual transmission; a continuously variable automatic is $1,000 extra. The least expensive sport model is the 2.0XT Premium, priced at $28,820.

But picking the fancier 2.0XT Touring version and adding a package of high-tech features that includes lane-departure warning, adaptive cruise control, high-intensity-discharge low-beam headlights and precollision braking can push the price past $36,000. That figure suggests high hubris, given that Foresters have never been considered prestige models, but a richly optioned Escape can also reach that level.

I tested both a 2.5i Premium, which had a sticker price of $26,320, and a 2.0XT Touring ($36,220).

The 2014 Forester is 1.4 inches longer and gets a new look — lauded by company officials — that drew little attention in two weeks of driving around northern New Hampshire, a prime habitat of Subaru enthusiasts. But settle inside and the all-around visibility is good; a huge panoramic sunroof, standard on many models, furthers the sense of openness.

Core Subaru values like practicality have not been forsaken. The basic controls for heating, cooling and ventilation rely on an increasingly forgotten and simple pleasure: large, easy-to-use knobs. However, an optional touch screen for functions like the stereo is frustrating, with tiny boxes best suited to dainty little fingers.

An important change is the addition of 3.7 inches more legroom in the rear, which Subaru justifiably felt was needed to attract families with children. That increase means the Forester now has more rear legroom than major competitors like the CR-V, Escape and Toyota RAV4. Behind the second row there’s a competitive 34.4 cubic feet of space (31.5 when equipped with a sunroof).

There are also important mechanical upgrades. The quaint 4-speed automatic that hobbled the previous generation’s acceleration and fuel economy is gone. It has been replaced with an utterly agreeable C.V.T. that offers a strong and instant response to the accelerator. Fuel economy is greatly improved, by up to 5 m.p.g on the highway and 3 m.p.g. in town.

A 6-speed manual transmission is standard on the two least expensive 2.5i trim levels, replacing a 5-speed manual. All other models get the C.V.T.

The entry-level engine is a 170-horsepower 2.5-liter flat 4-cylinder introduced in the 2012 Forester and then added to the 2013 Outback and Legacy models. With the automatic, it is rated at 24 m.p.g. city and 32 m.p.g. highway. Pick the 6-speed manual and the fuel economy drops to 22 city and 29 highway.

The other engine choice is the turbocharged direct-injection 4 rated at 250 horsepower at 5,600 r.p.m. Available only on the 2.0XT, it is making its North American debut. Mileage with the turbo engine is rated at 23/28, one mile per gallon less in the city and four on the highway than the 2.5-liter engine.

That 250 horsepower is up from the 224 produced by last year’s 2.5-liter turbo. However, that gain is offset somewhat by extra pounds. The 2.0XT’s curb weight of 3,622 pounds reflects an increase of about 172 pounds, in part a result of bigger wheels and brakes.

Subaru says the base 2.5-liter Forester will go from zero to 60 miles per hour in 9.3 seconds with the C.V.T. The turbocharged 2.0XT is 3.1 seconds quicker.

During two weeks of driving in the White Mountains of New Hampshire, what the 2.5i and 2.0XT proved to have in common was driving satisfaction, albeit in different amounts.

The electric power steering, new for 2014, is predictable and properly weighted, and for an all-wheel-drive vehicle the Forester is pleasingly quick to dig into a turn.

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Dover May Be Bottoming, But The Street's Already Thinking Recovery

Dover (NYSE:DOV) is one of those industrial conglomerates that is so diversified, it's not hard to feel a little sympathy for the analysts that cover the stock. From energy to smartphones to commercial refrigerators and gas pumps, covers the gamut of end-market exposures.

To that end, it doesn't say anything especially great about the economy that first quarter results were pretty weak, though the book-to-bill and management's optimism about a second-half recovery are encouraging. When it comes to the stock, however, it's a little hard for me to believe that the Street hasn't already skipped ahead a few pages and priced this stock for a recovery.

Q1 Sluggish, But Basically On Target
Although Dover had a soft first quarter, it was pretty much in line with expectations.
Revenue rose 4% as reported, but fell 1% on an organic basis. By segment, engineered solutions was the weakest with a 5% organic revenue decline, while communications was strongest with a 4% improvement. Energy came in flat with its organic revenue growth, while the printing & ID business was down 1%.

Even though Dover saw a 1% decline in volume and nearly always has one or more acquired businesses to integrate, gross margin declined only 10bp from the year-ago level and came in a little better than expected. Operating income was flat on a reported basis, while segment operating profits increased 1% (printing and energy were strong, communications and engineered solutions were weak) and came in almost in line with expectations.

SEE: Analyzing Operating Margins

Will Management See Its Big Turnaround?
Dover management is continuing to make the case that results will improve in the second half of 2013. Remember that while the news (and anticipation) cycle has already moved on to the future, what we're seeing reported here was the end result of pre-election spending/ordering worries coupled with adjustments made to cope with sequestration.
Management is looking for an improvement in drilling activity (Dover competes with companies like Baker Hughes (NYSE:BHI) and National Oilwell Varco (NYSE:NOV) for drilling-related products like drill bits and downhole equipment), and the Baker Hughes rig count has been getting better. The expected recovery in Europe may be a riskier bet, but other Dover-specific factors like easier comps in refrigeration and new products in consumer electronics and printing will also help.
On one hand, Dover did report a 1.09 book-to-bill for the first quarter, with results no worse than flat in the four major categories. On the other hand, major competitors like Danaher (NYSE:DHR) and Illinois Tool Works (NYSE: ITW) have been a little more cautious in their outlooks (though to be fair, both have a reputation for being conservative with their projections).

A Good Business, But Be Wary Of Outsized Expectations
There's a lot to like about Dover. The company runs over 30 independent companies under its umbrella, and has been pretty consistent with generating solid returns on invested capital. What's more, the company is no dilettante or dabbler – the Phoenix Hill company is a major name in commercial food service, Knowles is a dominant supplier of MEMS microphones, and Heil is a major name in garbage trucks.

SEE: Cash Cows Or Corporate Chaos?

What I don't like so much is the tenor of expectations. Analysts are pretty bold with their projections of ever-higher margins at Dover, even though management has already boosted margins from the very low double-digits in 2003-2005 to the mid-teens over the last two years. This isn't a Dover-specific problem, but rather a market problem and I think investors and analysts may be getting too bold in just assuming that margins can go higher and higher forever. So it's not that I think Dover is likely to do poorly, but rather I worry that investors are baking almost impossible-to-achieve expectations into today's valuations (not unlike what happened in the tech bubble over a decade ago).

The Bottom Line
While Dover has grown its revenue and free cash flow at rates of 7% and almost 8% over the past decade, I'm looking for about 5% and 6% growth over the next ten years. If Dover can achieve that, the stock's fair value today should be around $76. That's not too bad relative to a current price below $70, particularly when there aren't all that many bargains to be found these days.

I'd be cautious about buying Dover today, but really only because of my worries that the second half rebound may disappoint, that the market may be due for more correction, and/or that the “Peak Margin” hypothesis may have some validity. Outside of those macro worries, I like Dover just fine and I think it's a more than respectable industrial name to consider today.

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